Digital transformation and three strategic questions to ask

By Professor Krsto Pandza

About the author

Krsto Pandza is Professor of Strategy and Innovation and leads the Complex and Open Innovation for Networked Society (COINS) project between Leeds University Business School and Ericsson, a multinational telecommunication company.

This project has received funding from the European Union’s Horizon 2020 research and innovation programme under the Marie Skłodowska-Curie grant agreement No 675866.

Strategic management is not always about finding a solution for a perceived strategic challenge. It is often about asking the right questions and building a common understanding of what exactly the challenge is.

There are two basic assumptions that guide my personal understanding of strategic management. First, I strongly believe that strategy is about making decisions about allocation of resources under extreme uncertainty. The old guard of tech companies (Ericsson being one of them) inevitably face the challenge of long-term relevance. As humans cannot predict the future, any long-term (digital) transformation will be open to uncertainty, ambiguity and volatility.

Second, every strategy process is inherently political as different organisational coalitions with different interests try to influence the strategic direction of the company. It is wrong to see the political nature of strategy as something negative; it is far better to understand it as a fact of organisational life. A company is hardly ever a smooth profit maximising machine, it is rather a heterogeneous network of groups and individuals with a variety of motivations, aspirations, interests and perceptions that deliver a collective outcome.

My three questions for engaging with strategic challenges of digital transition work best if we embrace the notions of strategic uncertainty and the political nature of the strategy process.

1. What does digital transformation mean for Ericsson?

I suspect Ericsson is not short of internal documents that describe digital transformation and I am sure that the phrase has entered the internal vocabulary. The question is, however, whether this phrase has the same meaning for different people within Ericsson? It is not uncommon in large organisations that everybody uses the same vaguely defined construct without a collective meaning ever being developed. Such an ambiguity is potentially unproductive as it neither enables a coherent strategic response nor does it trigger a productive conflict between different possible strategic actions.

Digital transformation is often understood as the introduction of digital technology for supporting organisational capabilities in manufacturing operations, supply chain, research and development, and marketing. The challenge here is limited to making internal processes more efficient by using digital technologies. From this perspective a digital transformation is much less about exploring new markets and business models, but much more about doing the same things, albeit radically differently.

Another view on digital transformation originates from the recognition that availability of vast amounts of digitalised data provides companies with opportunities to commercialise such a big data with innovative services and business models. IBM transformation and recent GE considerations to enter the digital space exemplify such a strategic imperative. This view inevitably exposes a question of the strategic relation between products and services.

There is also a third view on digital transformation, which is caused by envying the business successes of digitally-born companies. Companies such as Google, Facebook and Amazon are attributed superior qualities and become role models for digital transformation. Rapid growth, entrepreneurial boldness, asset-light business models and no historical legacy of manufacturing all become desired characteristics that should guide the digital transition. This form of digital transformation implies a large cultural and identity change and it is certainly worth remembering that the digitally-born companies have never successfully implemented any major strategic transformation.

I am not suggesting that only these three interpretations of digital transformation are possible. There may be a fourth one or perhaps a blend of all of them is needed, but the core message is that negotiating a collectively shared meaning of digital transformation will help deliver appropriate strategic responses.     

2. Is digital transformation potentially disruptive to Ericsson?

It is hard to deny that we are living in an age of disruption, defined broadly as fundamental changes that re-order the ways in which organisations and their business environments operate to create and appropriate value. Academics and managers have always been intrigued by discontinuous change and creative destruction of old products, services and business models replaced by the new ones.

Disruptive innovation is often equated with a major and discontinuous change, especially one driven by a radically new technology. Such a view is not wrong, but is certainly far from complete. At the heart of disruptive innovation is obsolescence of existing knowledge, expertise, organisational capabilities and business models. Disruptions, therefore, destroy the value of investments that an incumbent organisation has made in these areas.

In other words being disrupted suggests that an organisation may still be very good at its core business, but this core business does not matter anymore. Andrew Grove, a former Intel CEO, once observed that only the paranoid survive. This famous quote illustrates that high-tech companies are less concerned in being beaten in their own game, but fear much more for a disruptor to radically change the rules of the game. 

Strategists at technology companies frequently use the word disruption incorrectly, often using it even if they feel their companies are not facing the threat of obsolescence in the present. This indicates a difficulty in managing relations between past, present and the future. The future is often portrayed as having an abundance of exciting, technology-driven opportunities with a disruptive potential. The strategic conversations about the future tend to ignore uncomfortable questions about the consequences for the present and the relevance of past experience.

If digital transformation is indeed potentially disruptive for Ericsson then the question is which capabilities, expertise and businesses are obsolete. If nothing is considered obsolete then the transformation is perhaps discontinuous, but not truly disruptive. If, however, the digital transformation is strategically perceived as having disruptive characteristics then a precise and unambiguous identification of obsolete expertise, organisational capabilities, products and services is of utmost importance. If we remember the assumption of a political nature of an organisation then it is easy to understand why talking about disruption is easy as long as it does not address the real issues of obsolescence. If the digital transformation is disruptive then it is important to pay attention to how today’s emerging businesses opportunities could become the core businesses of the future.                    

3. How should managers organise for digital transformation?

Academic literature is not short of advice on how to organise for radical strategic shifts. Managers are advised to separate teams that are focused on incrementally improving core businesses and to explore emerging business opportunities in unfamiliar and radically new (often non-existing) markets. The processes and key performance indicators must differ amongst teams that are involved in different types of innovation activities. The teams exploring emergent opportunities should be able to systemically scan peripheral environment for emerging technologies, new business models, nascent industries and unconventional customers.

In order to respond to uncertainties of exploration they should collaborate with multiple actors in the ecosystem (universities, start-ups, competitors, customers, suppliers, regulators and companies from other industries). Exploration of transformative businesses requires a disciplined and staged investment approach into portfolio of opportunities. Initial investments should be small, but sufficient to reach the next milestone. The financial and strategic commitment increases when the uncertainty around emerging business reduces.

Successful management in the age of disruption requires an environment supportive of autonomous and entrepreneurial actions and willingness to embrace uncertainty and potential contradictions between old and new. If an organisation develops a disruptive technology it is well advised to communicate benefits to members of the innovation ecosystem and balance between competition and cooperation. Additionally, introducing radically new businesses within an established organisation does not only require technical knowledge and business acumen, but also social skills in navigating formal and informal structures in an organisation.

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